The public could be offered the chance to buy shares in Lloyds Banking Group as early as next month after the taxpayer-backed lender said it was in the advanced stages of preparing a prospectus for a retail offer.

In a surprise update ahead of the release of its full-year results next week, Lloyds said preparatory work on “certain documents required for a possible future sale of shares” was well under way, leading to speculation a retail offer could come in March or April.

George Osborne, the Chancellor, authorised the first sale of the state’s holding in Lloyds last year, selling a 6pc stake in the bank for £3.2bn in September through an institutional offering.

However, expectations are growing Mr Osborne could authorise a second sale within weeks that would combine an offer of a slice of the state’s remaining 33pc stake in Lloyds to large institutional investors as well as a separate offer for members of the general public.

Shares in Lloyd fell by more than 3pc yesterday to 80.5p as the bank warned it would have to set aside a further £1.8bn against the cost of compensating customer mis-sold payment protection insurance. The bank added that its underlying pre-tax profit for last year would be £6.2bn, £400m higher than City forecasts and double the amount it made in 2012.

The new provision, which took the bank’s total bill for PPI to £9.8bn, came as the bank also said it would not be resuming dividend payments until the second half of the year.

Lloyds said it would be asking the Prudential Regulation Authority for permission to pay a dividend later this year and added that its initial payout would be “modest”.

Joseph Dickerson, banks analyst at US investment bank Jefferies, said the announcement was disappointing. “The 'modest level’ is disappointing to us as we had factored in a 40pc payout in 2015, which looks optimistic in light of today’s [Monday] announcement,” said Mr Dickerson.

Antonio Horta-Osorio, chief executive of Lloyds, said that despite the disappoint among some, Lloyds had made “significant progress” in the last year.

“We expect to apply in the second half of 2014 to restart dividend payments and to deliver progressive and sustainable payments to shareholders thereafter. This will be another important step in our journey to rebuild trust and confidence in our Group.”

Making dividend payments is seen as a crucial move towards the full privatisation of Lloyds. The bank has not paid a dividend to shareholders since its bailout in 2008 and resuming payouts to investors would be a further sign of the bank’s recovery.

Announcing a dividend would also be useful ahead of an expected full retail offering of Lloyds shares later in the year. Sources close to the process believe that following the bank’s half-year results the government could launch a 'Tell Sid’ style offer of the shares to the public.

If such a sale were to take place it could see the state sell nearly all of its remaining holding in Lloyds and possibly the entirety of the holding if market conditions are considered suitable.

“This was a bailout, not an investment. The Government must try to secure the best deal for the taxpayer. But it should - and will - have the interests of the economy as a whole in mind too,” said Andrew Tyrie MP, chairman of the Treasury Select Committee.

He added: “Indefinite public ownership is certainly not the way forward, with all the pressures and temptations to meddle that come with it.”